According to a 2019 Bank of America study, 68% of small business owners think payroll is their most difficult management task. Do you fall into this statistic? If so, try an easy-to-digest payroll process flowchart to help you gain confidence in running payroll.
A flowchart organizes a sequence of actions to help make something simpler to understand. A payroll flowchart visualizes the process of running payroll, withholding deductions, and distributing paychecks to employees. In short, it breaks down the process bit by bit.
Read on to learn more about the payroll process, view our ultimate payroll process flowchart example, and more.
Pre-payroll flowchart responsibilities
As an employer, it’s your responsibility to do a few other things before you can go through the steps of the payroll cycle flowchart.
You must decide what pay frequency and which employee payment method you want to use.
Your frequency determines how often you must use your payroll process flow chart diagram. You can choose from four main frequencies, which are weekly, biweekly, semiweekly, and monthly. Once you choose your pay frequency, you must stick to it. If you need to change payroll frequency, check with your state and notify employees before adjusting your process.
The payment method determines how employees receive their wages. When it comes to how to pay employees, you may decide to offer employees direct deposit, paper checks, mobile wallets, pay cards, or cash. The type of payment your employees receive may dictate how many days before payday you need to run payroll.
Of course, you must do some things each time you hire an employee, too. Among other tasks, you need to collect new employee forms, report new hires to your state, and determine whether the employee is exempt vs. nonexempt.
You must also figure out how you want to run payroll. You can run payroll by hand, outsource it, or use software. If you use payroll software, your provider should guide you through the process.
What are the main steps in a payroll system flowchart?
So, how does payroll work exactly? If you’re a little foggy on how to do payroll, here’s your refresher on the steps that go into a payroll procedures flowchart.
Payroll can be broken down into four main parts:
- Calculating gross pay
- Subtracting taxes and other deductions
- Verifying payroll
- Paying employees
1. Calculating gross pay
The first step of the payroll process is to calculate an employee’s gross wages. You can do this by entering numbers into your payroll system. Determine how many hours each employee worked during a pay period. Then, multiply those hours by the worker’s hourly rate.
Now, ask yourself whether a nonexempt employee works overtime. If so, you must also account for overtime pay. Overtime pay is time and a half (1.5) the employee’s regular hourly pay rate for each hour worked over 40 in a workweek.
Entering numbers gets you each employee’s gross wages, which are earnings before payroll deductions.
Questions to ask:
- How many hours did my employee work?
- What is my employee’s hourly rate?
- Did a nonexempt employee work any overtime?
2. Subtracting taxes and other deductions
The next main section in the payroll process flowchart is to deduct taxes and other deductions from each employee’s gross wages.
Before subtracting taxes, determine whether an employee has any pre-tax deductions (e.g., 401(k) plan contributions). Pre-tax deductions are not subject to certain taxes, so they lower the employee’s taxable income.
After handling pre-tax deductions, subtract taxes from your employee’s wages. Take a look at the taxes you are responsible for withholding from an employee’s wages:
- Federal income tax (based on Form W-4 and federal tax withholding tables)
- Social Security tax (6.2%)
- Medicare tax (1.45%)
- State and local income taxes (if applicable)
- State-specific taxes (e.g., Oregon transit tax)
Do not withhold federal income tax if you have an employee who claims complete exemption from federal withholding.
If the employee has any post-tax deductions (e.g., Roth 401(k) plan contributions), deduct them after withholding taxes.
Keep in mind that there are also employer responsibilities, too. Employers must contribute a matching employer portion of Social Security and Medicare tax. And, employers entirely pay FUTA tax and SUTA tax (in most cases).
Once you’ve deducted taxes, keep the money in a separate payroll tax account to avoid spending it. That way, you can easily remit the amounts to the proper tax agencies when the time comes.
Your employee’s gross wages minus total deductions equals their net pay, which is their take-home pay.
Questions to ask:
- Does the employee have any pre-tax deductions?
- Is my employee exempt from federal income tax?
- Are there any applicable state and local taxes?
3. Verifying payroll
One of the last main sequences in our flowchart is the process of approving payroll.
Making payroll mistakes can be costly. You must verify the information you enter is accurate. If you are handling payroll by hand, you also need to double-check (and maybe triple-check) your calculations.
Does your payroll look good to go? Great! Then you can move on to the final step of actually paying your employees.
Questions to ask:
- Is the information entered correctly?
- Are my calculations correct?
4. Paying employees
Remember that payment type you selected for the employee? Now’s the time to use it.
Keep in mind that if you pay the employee via direct deposit, remember that it may take a few days to process.
When you pay employees, you might also need to provide pay stubs, depending on pay stub laws by state. If your state does not explicitly require that you distribute pay stubs, doing so is still a good idea.
Questions to ask:
- How does this employee receive their wages?
- Do I need to provide a pay stub?
Ultimate payroll process flowchart
I don’t know about you, but the above information may be a bit to take in at once. This flowchart puts the above steps and questions into an easy-to-digest sequence of events.
Don’t want to do this process manually before every payday? Who does! Automate it with Patriot’s online payroll. Our software uses a simple 3-step process to make running payroll a snap. Ditch the busyness and get back to your business: Start your free trial now!This is not intended as legal advice; for more information, please click here.